Graham Stack in Kyiv -
"2008 was our best ever year. It was very exciting - we earned over $2bn profit, opened new facilities, and produced and sold over 110,000 vehicles," sighs Bogdan Corporation's CEO Oleg Svinarchuk. But with the crisis causing the domestic market to collapse and Ukraine's accession to the WTO making foreign imports a whole load cheaper, Svinarchuk admits it's back to the drawing board
2008 followed almost a decade of double-digit expansion of the Ukrainian automobile market. Bogdan's car production figures quadrupled in the five years from 2004 to just under 90,000. With only 150 cars per 1,000 people compared with 600-700 in Western Europe, this seemed to be only the start of the journey.
Bogdan specialises in assembling budget cars, above all Russia's Soviet-era AvtoVaz models known in the West as Lada. Svinarchuk admits the lasting popularity of the brand, still the top seller in Ukraine, is a "forced love" linked to the unbeatable price at $3,000-4,000. But he argues that the brand enjoys real kudos linked to its past as the number-one Soviet chick magnet - and also its ease of service.
And with times changing and the availability of cheap car credits spreading in Ukraine thanks to foreign banks, Bogdan has expanded its product range, launching Hyundai, Kia, Subaro, and Isuzu models. Kia and Hyundai now rank among Ukraine's top-10 brands.
With a market share of almost 20% in 2008, Bogdan's ambitions were underlined by its launching of a brand new plant in the town of Cherkassy for Hyundai models, with an annual capacity of 150,000 units. Bogdan also has production lines for 21,000 trucks, 19,000 special vehicles and 9,000 buses. "In addition to the Cherkassy plant, in 2008, we expanded our bus production at our Lutsk plant, and launched assembly of Isuzu trucks," says Svinarchuk.
"Our long-term goal is for Bogdan Corporation to be present in all spheres of automotive industry with a product range encompassing cars, buses, trolleybuses, trucks, and plans for trams, electric and metropolitan trains, including all required metal processing capacities," he explains.
And as a further step towards this goal, In the course of 2008, Bogdan consolidated its diverse assets into a vertically integrated holding.
The logical next step was for Bogdan to find a strategic investor among global car majors - and this dream nearly came true for Bogdan in 2008, according to Svinarchuk. "We had a very serious offer from an international structure towards the end of 2008 - but the crisis meant that nothing came of it."
Instead of attracting strategic investment, Bogdan found itself having to pay back huge debts. "We took out a lot of loans to finance last year's investment plans. We have over $300m in long-term loans directed towards these projects," says Svinarchuk. "Unfortunately we also had large short-term debts we used to purchase components." Bogdan has paid back over $400m in short-term debt, with another $250m of short-term debt to be paid back this year.
Bogdan also suffered "huge losses" as a result of the collapse in the hryvnia. The proceeds from a 3% private placement bought in January by UK private equity group NLV for $13m "went purely to fill the hole in our operating capital this left."
But the most serious blow the crisis dealt to Bogdan has been the terrifying collapse of demand for cars. Previous years' rocketing demand for cars was a result of snowballing credit expansion by foreign banks doling out cheap loans. Some 50% of cars sold in 2008 were purchased on credit. "30-40% per annum growth over the last few years was of course driven mainly by this credit expansion. But it was not a bubble, at least regards us. We reinvested all our profits in production," says Svinarchuk.
But with the credit market now dead, demand for cars has collapsed. And this is before the effects of salary cuts and soaring unemployment kick in. Not to mention the market flooding with repossessed cars. Sales figures for January show demand for cars plummeted 55.5% on the year, according to IAG Autoconsulting.
As a result of the market collapse, some analysts anticipate a merger between Bogdan and Bogdan's main competitor, Ukravto, Ukraine's largest car producer. Svinarchuk says this is not an immediate prospect, "but never say never - we have very good personal and business relations with Ukravto".
Most galling for Bogdan's CEO is that devaluation brings the company no price advantage relative to foreign imports - because almost all Bogdan's component parts are imported despite Ukraine having a giant steel industry. "Ukraine simply produces no steel high-grade enough for use in car production," he laments.
And if that was not enough, Ukraine's much touted fast-tracked World Trade Organisation (WTO) accession in 2008 saw the government dispense with all protective measures for domestic car markers, with immediate effect. Previous to WTO accession, protective tariffs added almost 50% to the price of foreign imports. The government's failure to negotiate even a transitional period appalls Svinarchuk. "No single other country failed to negotiate a transitional period for removal of protective tariffs," he complains.
Svinarchuk argues that the current crisis exposes the fatal flaw in Ukraine's development - the government's failure to develop productive capacities and technology transfer. Instead, a misplaced focus on free trade has led to a flood of imports. Svinarchuk calls for a radical change in economic policy. "There is only one scenario for development," he outlines. "Cutting corporate taxes, cutting consumption taxes, but raising import duties and encouraging import of technologies through FDI and free economic zones, while restoring those industries where we were leaders in Soviet times: defence, ship-building, aerospace."
"But we know why foreign companies won't set up production here: the high level corruption and the bureaucracy - you can spend five years trying to get the land to build a factory, and in the end you still won't get it."
"How can it be that, paradoxically, just at the moment when people's incomes are falling due to the crisis, prices are rising after devaluation? The answer is that everything we buy here is imported. There will be no import substitution in Ukraine, because we don't produce any finished products here. And this is our great failure over 18 years of independence."
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